Former top KPMG partner gets a year and a day in prison

First there was Arthur Andersen partner David Duncan, the Enron-enabler. Then there was David Friehling, who rubber-stamped Bernie Madoff’s filings with securities regulators. Now the accounting world has a new fallen figure: David Middendorf, the former national managing partner for audit quality and professional practice at KPMG.

Middendorf was sentenced today to one year and one day in prison for stealing confidential government information so the Big Four accounting firm could do better in its annual exam with regulators.

Convicted at trial earlier this year, Middendorf was unrepentant to the end.

Still, the judge imposed a more lenient sentence than the 37 to 46 months suggested by federal guidelines because, Oetken said, Middendorf didn’t profit directly from his crimes and isn’t likely to be a repeat offender. The year-and-a-day sentence means Middendorf could be incarcerated for only about 10 months if he behaves himself, Oetken added, noting that federal convicts sentenced to a year or less aren't eligible for reductions in time served. Even so, Middendorf’s attorney, Nelson Boxer, said his client will appeal the sentence.

The roots of the case go back to four years ago, when KPMG, the smallest of the Big Four, was being held to account by the Public Companies Accounting Oversight Board for “deficient” audits. That means the firm hadn’t gathered enough supporting evidence before signing off on a company’s financial statements and internal controls.

KPMG reacted to the regulatory problem by recruiting people from its regulator. They included Brian Sweet, who has pleaded guilty to conspiracy charges. Sweet copied confidential PCAOB information showing which KPMG audits would be reviewed by the regulator and shared the information with his new colleagues.

Over lunch on his first day at the job, Middendorf asked Sweet if KPMG’s audits of Wells Fargo and Stonegate Mortgage would be inspected. When he heard the answer, “Middendorf got so animated that he slapped the table,” according to trial testimony cited by prosecutors in a sentencing memorandum.

The next day Middendorf “told Sweet that he was to share insight and add valuewherever he could, and implored Sweet to remember where his paycheck came from,” the document read.

Middendorf was one of five KPMG employees charged in the scheme, which one government official said amounted to “literally stealing the exam.” Two others await sentencing, and another is scheduled to go on trial. The 55-year-old Middendorf is a father of three and the most senior of the former KPMG executives charged.

“He of all people should have known this was wrong,” Assistant U.S. Attorney Jordan Estes said in court.

KPMG has more than 10,000 partners and 207,000 employees globally, including 57,000 in the United States. The firm generated $29 billion in total revenue last year.

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